Thursday, 12 April 2012

Agreement and Difference with Minister Howlin

Nat O'Connor: Minister Brendan Howlin’s opinion piece in the Irish Times is to be welcomed. It is valuable to have a Government Minister engaging with the vital arguments put forward in the joint opinion piece of Friday 6th April by 39 economic analysts, many of whom are members of TASC’s Economists’ Network.

There are a number of areas of agreement between both pieces. Both seek to achieve recovery through growth and both acknowledge the important role of achieving productivity and efficiencies in the public service. Most significantly, both agree with the importance of investment, and Minister Howlin’s piece identifies similar sources for investment as those identified in the original article, such as the NPRF and pension funds.

There is potentially a significant difference of opinion in the articles about what would be the role of investment now. Minister Howlin confusingly supports investment yet dismisses stimulus as short-term only. It appears to be on this basis that he claims the Government can go no further in the direction of counter-cyclical policies. The depiction of investment as mere stimulus fails to see the win-win scenario that is possible from targeted investment in specific infrastructure and human capital (such as broadband and education) which will also result in an increase in the economy’s long-term productive capacity. Ireland would in future reap the rewards of these investments, as they create opportunities to create and expand businesses that would not be possible without such investment.

Minister Howlin rightly points to the scale of the problem confronting the State, in terms of the enormous gap between tax revenue and spending. However, he fails to address the options for structuring taxation differently to increase revenue and to balance some of the injustice of regressive tax measures, like the increase in VAT. Likewise, the problem is ultimately not just the State’s finances, but the finances of the country as a whole, including private debt and the crisis of unemployment.

Surprisingly, Minister Howlin does not mention unemployment and job creation, although in fairness, they may be implied by his discussion of increasing investment. However, it is important that growth in sustainable jobs is the measure of success, not just GDP growth statistics. In the context of jobs, Minister Howlin does not explicitly mention the demand-side to job creation (that is, the need for more demand in the economy to permit job creation) but again this may be implicit in his emphasis on investment.

It is unfortunate that Minister Howlin does not address the economic and fiscal costs of social disinvestment. Public service cuts can lead to social costs such as more young people leaving education early, worse educational outcomes overall, less early intervention in health and mental health problems, and so on. These costs have a real effect on the economy, by lowering its long-term productive capacity – the reverse effect of productive investment.

Moreover, social problems have a real effect on the Exchequer, as a euro saved today may result in crime or health issues that cost many more euros tomorrow. If preventing social problems now (through early intervention or education supports) is cheaper than paying to deal with them in future, Ireland’s lenders can accept that this increases rather than diminishes Ireland’s debt sustainability. The 'troika' care more about the debt being repaid than the means used to do so, and they are open to rational cost-benefit calculations such as this.

There is some agreement between the articles on the importance of action at the EU level. However, Minister Howlin only focuses on the role of the European Central Bank, whereas arguably there has been a failure of leadership by both the Council and Commission. The dogmatic pursuit of price stability by the ECB is also unhelpful, and needs to be tempered by an equal focus on employment and sustainable growth in the Euro zone economies. Yet, there is little sign of this kind of thinking at EU level, where there are the resources for an EU-wide programme of productive investment.

Minister Howlin offers a defence of the fiscal compact treaty, which will require Ireland to reduce its structural deficit to less than half of one per cent. From a Keynesian perspective, it is economically correct to have some kind of mechanism that will oblige a Government to save during good economic times. However, Minister Howlin is factually incorrect when he suggests that having the compact would have caused the previous administrations to stow away more savings. This is because major institutions, like the IMF and ECB, claimed that Ireland had a structural surplus during the boom. It was only retrospectively that these calculations were substantially revised to show structural deficits in the last years of the boom. The difficulty in defining and measuring structural deficits – let alone forcing governments to act on them – should not be underestimated.

Minister Howlin acknowledges that he simplifies the argument made by the original contributors. We were certainly not arguing that there is a simple or pain-free way to achieve Ireland’s social and economic recovery. The Fianna Fáil policies of 1977 he dismisses were focused on increasing current spending as a crude stimulus, which is far from what is being proposed by the call for productive and targeted investment through capital spending on infrastructure and human capital.

What is at stake is whether or not there is a viable set of economic policies that would address the jobs crisis and social problems resulting from the current crisis, while also addressing the fiscal crisis that the State faces, as an alternative to the economic approach being taken by the current Government, which in many of its core aspects is a continuation of the policies of the previous administration.

Building on the areas of agreement, such as public service reform and the need for investment, the following arguments (and points of disagreement with Minister Howlin) are reasons to believe the alternative being proposed is viable:
• Productive investment is much more than short-term stimulus because it will increase our economy’s future productive capacity and job creating capacity, which in turn will raise the State’s revenue;
• Much more could be done to restructure taxation to make it more just and to bridge the State’s deficit;
• Social problems through social disinvestment will cost more to solve than they will to prevent – and lenders can be persuaded of that;
• The EU could do much more to solve the crisis, including changing the mandate of the ECB to include maximum employment and sustainable growth.


Paul Hunt said...

Lord save us all. Not another thread open on this topic!

Anonymous said...

Jeez, you guys are like so needy!

The slightest bit of attention from a Minister, even when he dismisses your manifesto as "fantasy", and we have self-congratulatory threads popping up left and right.

Did it pass by your notice that the Minister was largely talking in meaningless platitudes?

Take this gem:

I believe that the response of the public sector to this crisis has been a tribute to our public servants. With fewer resources and considerable reductions in take-home pay they have mobilised to face a considerable increase in the services demanded of them.

delivered on the very same day that we heard reports of a public servant pulling a fast one to bump up their pension by a multiple of the amount that an average private sector worker could ever hope to retire on after a lifetime of hard saving:

Of course, the "independent" thinkers on this site will line up to advocate that such feather bedding must be maintained at all costs. Any kind of sanity in lining up up public pay with European norms or taxing public service pension entitlements will be dismissed out of hand. What, oh what, will become of the villa renovation industry in Tuscany if the retirement gratuity was taxed? Far less damaging to tax the hell out of productive workers.